Morgan Stanley is bullish on Tesla, Inc. (TSLA.US) as its autonomous driving business accelerates expansion, and has raised its target price to $410.

Morgan Stanley released two research reports after Tesla, Inc. (TSLA.US) announced its third-quarter 2026 financial results, stating that the company's robotaxi business is reaching an important inflection point for scaled expansion, paid FSD subscription rates continue to exceed expectations, and improving profitability in the automotive and energy storage businesses provides a more solid foundation for future investment. Based on progress in the autonomous driving business and improved profit expectations for core operations, Morgan Stanley raised its Tesla, Inc. target price to $410 from $400 and maintained its "Hold" rating. Morgan Stanley analyst Andrew Percoco noted that Tesla, Inc.'s third-quarter results provided more evidence that the company is moving toward commercialization of autonomous driving and Siasun Robot&Automation technology. Among the highlights, rapid growth in Robotaxi operating mileage, an increase in paid FSD users, and improved energy storage margins were the three most noteworthy items in the earnings report. Financial data showed that Tesla, Inc.'s third-quarter revenue was $28.046 billion, slightly below the market expectation of $28.131 billion; non-GAAP earnings per share were $0.48, above the market expectation of $0.45. Operating profit reached $718 million, exceeding the market expectation of $687 million, with an operating margin of 2.6%. In the automotive business, gross margin excluding regulatory credit revenue reached 18.1%, above the market expectation of 16.7%, mainly benefiting from an improved vehicle sales regional and product mix as well as higher FSD subscription revenue. Energy storage gross margin reached 33.1%, significantly exceeding the market expectation of 25.7%. Cash flow performance also beat expectations. Tesla, Inc. generated free cash flow of $1.531 billion in the third quarter, while the market had previously expected negative $4.385 billion. Morgan Stanley noted that this was mainly due to working capital improvement and lower-than-expected capital expenditures. However, Morgan Stanley believes that the most long-term significant change for Tesla, Inc. is not short-term financial metrics, but rather that the autonomous driving business is beginning to show clearer signs of scaled expansion. According to Morgan Stanley's estimates, Tesla, Inc.'s Robotaxi weekly autonomous driving mileage has grown from about 44,000 miles in early July to about 558,000 miles, with a weekly growth rate of nearly 30% over the past three weeks, markedly higher than the average growth rate of about 15% to 20% in the previous eight weeks. At the same time, the size of Tesla, Inc.'s Cybercab fleet operating in Austin has expanded tenfold since its launch a month ago. Morgan Stanley believes this shows that the company is gradually moving from the early software validation stage to larger-scale commercial operations. Tesla, Inc. management expects to launch the Cybercab service in Dallas next month and plans to further expand Robotaxi operations in cities including Las Vegas, Jacksonville, Phoenix, and San Antonio. In addition, the company plans to increase vehicle density in existing operating areas and gradually expand service hours, with the goal of moving toward all-weather operations, higher-speed roads, highways, and service under more weather conditions by the end of the year. However, management also acknowledged that software capability remains the main factor limiting Robotaxi expansion, and as the technology gradually matures, regulatory approval may become a more important constraint in the future. Morgan Stanley believes that continued growth in unsupervised autonomous driving mileage, fleet size, and safety performance will be key indicators for judging whether Robotaxi can truly achieve commercial operations. The FSD business also showed strong growth momentum. In the third quarter, more than 75% of Tesla, Inc.'s new vehicle deliveries in North America were equipped with paid FSD subscription services, up more than 20 percentage points from 55% in the second quarter. Meanwhile, the number of global paid FSD users has increased from about 1.5 million in the second quarter to more than 1.7 million. Morgan Stanley noted that FSD is increasingly becoming an important factor influencing consumers' vehicle purchase decisions. As software capabilities continue to improve, FSD is expected to create more high-margin recurring revenue for Tesla, Inc. Tesla, Inc. also expects that as early as the second quarter of 2027, some private owners may be allowed to connect their vehicles to the unsupervised Robotaxi network, but this plan still depends on software maturity and progress in integrating the fleet management system. The company also expects that broader FSD regulatory approval in Europe may make progress in the first quarter of 2027, but the exact timing remains uncertain. In addition to autonomous driving, the energy storage business has also become an important reason for Morgan Stanley's upward revision of Tesla, Inc.'s valuation. Tesla, Inc. management said that driven by growing data center demand and electrification trends, the company's 2027 Megapack energy storage production capacity is already close to sold out. Strong order demand is expected to enhance the company's pricing power and support further margin improvement in the future. In the third quarter, Tesla, Inc.'s energy storage gross margin rose to 33.1% from 20.4% in the second quarter. However, Morgan Stanley cautioned that this sequential improvement was mainly driven by tariff refunds and favorable warranty cost adjustments, so the gross margin level for the quarter should not be directly regarded as sustainable over the long term. On capital expenditures, Tesla, Inc. has lowered its 2026 capital expenditure guidance to about $20 billion from more than $25 billion previously, which is conducive to improving free cash flow performance in the short term. But Morgan Stanley emphasized that this does not mean the company's long-term investment scale will decline significantly. With the advancement of Robotaxi, the Optimus humanoid Siasun Robot&Automation, AI computing power, CECEP Solar Energy manufacturing, and semiconductor capacity construction, capital expenditures may remain at a relatively high level in the coming years. Among these, Tesla, Inc.'s planned TeraFab semiconductor manufacturing project is expected to require capital equipment investment alone of possibly tens of billions of dollars by early 2028, with total long-term investment potentially exceeding $100 billion. However, how the related investment will be allocated between Tesla, Inc. and SpaceX remains to be determined. In the humanoid Siasun Robot&Automation business, Tesla, Inc. has begun early production of Optimus at the Fremont factory, and most equipment has been installed on a production line planned for annual capacity of about 1 million units. However, Musk said that achieving an annualized production rate of about 20,000 units per week may take at least another year, or even longer. The company expects to gradually resolve remaining issues in hardware, AI capabilities, and the supply chain by the end of 2027 and aims to begin delivering Optimus to external customers by then. Morgan Stanley therefore believes that the long-term commercialization prospects for Optimus remain worth anticipating, but true large-scale deployment may take longer. Based on the latest earnings report and business progress, Morgan Stanley raised its adjusted EBITDA forecasts for Tesla, Inc. for 2026 and 2027 by about 1% and 3%, respectively, while raising its 2026 gross margin forecast to 19.2% from 18.6%. The bank also lowered its 2026 capital expenditure forecast to $20 billion from about $26 billion, and its 2027 forecast to $27.5 billion from about $29 billion. Accordingly, it expects the 2026 free cash flow shortfall to narrow to $2.9 billion from the previously forecast $11.7 billion, and the 2027 shortfall to narrow to $9.7 billion from $14.2 billion. On valuation, Morgan Stanley raised its Tesla, Inc. target price to $410. Among this, the core automotive business is valued at $45 per share, the energy business at $40, the Robotaxi business at $123, the FSD-related network services business at $147, and the humanoid Siasun Robot&Automation business at $55. Morgan Stanley believes that Tesla, Inc. is gradually transforming from a business model centered on electric vehicle sales into a platform company integrating autonomous driving services, energy business, and Siasun Robot&Automation technology. However, considering uncertainties related to future R&D expenses, capital expenditures, and commercialization of new businesses, the bank maintained its "Hold" rating. Overall, Morgan Stanley's stance on Tesla, Inc. is more positive than before, especially bullish on the long-term value brought by rising FSD paid penetration and the expansion of Robotaxi operating scale. However, whether it can translate technological progress into sustained profitability while controlling the huge investment needs of the AI and Siasun Robot&Automation businesses will remain an important factor determining Tesla, Inc.'s future valuation.